Indian government to encourage mediation for large public procurement disputes in India

The latest development means arbitration should not be used as the norm in procurement contracts, especially in large value contracts. The use of arbitration will be limited to disputes with a value less than Rs 100 million (approximately £940,000). The inclusion of arbitration clauses where disputes with a value exceeding that threshold are expected will need to be justified on a case-by-case basis and require approval by the government.

In 2023, India enacted the Mediation Act to provide a legal framework for the use of mediation as an alternative and cost-effective mode of dispute resolution.

Construction disputes expert Mohammed Talib of Pinsent Masons said the move could be contrasted with recent trends showing that arbitration continues to gain traction in India.

“The Indian government is one of the biggest users of arbitration, especially on infrastructure projects, and the international norm is for arbitration to be used on infrastructure projects and construction projects. Arbitration is traditionally recognised to have several advantages over litigation, including those set out in the government’s circular,” said Talib.

The guidelines published by the Ministry of Finance of India stated that the expected benefits of arbitration include achieving quicker resolution of disputes; providing convenience and technical expertise; and the binding nature of arbitration decisions. However, the document said that “notwithstanding the expected benefits of arbitration, the actual experience of arbitration in respect of contracts where the government is a party have been, in many cases, unsatisfactory in meeting the expectations”.

The guidelines claimed that the arbitration process takes longer than expected and is expensive, while the reduced formality and the finality of decisions have often led to wrong decisions on facts and improper application of the law. They also point out that a large majority of arbitration decisions are being challenged in the courts both by the government and by the opposite party, when the decision of the arbitrators is not to the satisfaction of either party. As a result, “instead of reducing litigation, it has become virtually an additional layer and source of more litigation, delaying final resolution”, according to the document.

A recent ruling by the Supreme Court in India shows how long the process to enforce domestic arbitral awards in the country can become. In April, the Supreme Court exercised powers under the Indian constitution to overturn one of its own decisions, with the effect being that an award made in arbitration and subsequently enforced before the courts, relating to a long-running dispute over works on a major transport project in Delhi, will need to be refunded.

While imposing restrictions on arbitration, the guidelines encourage parties to public sector contracts to resolve their disputes via mediation or negotiated amicable settlements. For matters of high value, government bodies may constitute a high-level committee (HLC) for dispute resolution, which may consist of a retired judge or a retire high-ranking officer or technical expert. The HLC could act as the mediator in a mediation, or review the tentative mediated or settlement agreement when the mediation is conducted through a mediator or a solution is directly negotiated with the other party.

International arbitration specialist Scheherazade Dubash of Pinsent Masons identified the importance of the guidelines for those doing business in India:

"For international companies doing business in India, it's crucial to have a well-defined dispute resolution strategy from the outset and international businesses will now need to pay close attention to the dispute resolution clause if the public sector plays any part in the project,” she said.

“The guidelines mean that international companies doing business with Indian public sector entities or projects need to carefully review their dispute resolution. Arbitration may no longer be a viable option for high-value disputes, so companies should explore alternative dispute resolution methods like mediation and negotiated settlements early on or accept that they face litigation in the Indian courts.”

In June 2023, the Indian government appointed an expert panel led by former law secretary TK Vishwanathan to propose reforms to the 1996 Arbitration and Conciliation Act, with a view to alleviating the burden on judicial resources and boosting India’s status as an international arbitration hub. Reporting in February, Vishwanathan and the committee highlighted the importance of party autonomy in arbitrations, recommending mandated informed consent to the inclusion of arbitration clauses in purely domestic contracts. Domestic parties should be fully aware of the costs and timelines associated with arbitration before accepting such a clause, and be given the option to choose mediation over arbitration, the committee said.